Two Sides of the Same Coin: Sustainability and Profitability

inf3-182_fuel_economy_save_fuel_at_work_factory_interior_cartoon_artist_clive_upttonWant proof that investing in sustainability leads to better financial performance? Here it is

The current human population of 7 billion has put pressure on ecosystem services, resources, food supplies and species survival. By 2050, the population is estimated to swell to a staggering 9 billion. At that time, according to the United Nations Development Programme (UNDP), humanity will require three times the amount of fossil fuels, biomass, ores and minerals that we use up now—some 140 billion tons of "fuel"—to feed its appetite for consumption (or rather, destruction).

Today, the more advanced economies have the most insatiable appetites. "Developed countries' citizens consume an average of 16 tons of those four key resources per capita (ranging up to 40 or more tons per person in some developed countries)," UNDP says. "By comparison, the average person in India today consumes four tons per year."

UNDP warned that the tripling of resource depletion which would occur under BAU (business as usual) would be "far beyond what is likely to be sustainable."

REDUCING OUR APPETITE FOR DESTRUCTION

One way to reduce our appetite for destruction would be for consumers to buy and consume less stuff. Another is for companies to become more sustainable, and in particular, resource efficient. Considering that—according a 2010 report for the UN—the world's top firms caused USD 2.2 trillion in environmental damage in 2008 alone, resource efficiency must become a primary piece of business strategy across the board.

But companies face a number of issues in terms of sustainability strategies, such as the ROI uncertainty, as it can be difficult to measure the effect of sustainable investments. Becoming more resource efficient has to be financially worth it, even in the short term, particularly for publicly-traded companies that quarterly investor demands. Another problem is one of PR: Some firms face backlash for greenwashing if they can't prove a direct connection between their actions and the results of those actions. And while ethical and sustainable consumerism has been on the rise, the vast majority of people don't consider the environment when making buying decisions.

LESS IS MORE

Gerrit Heyns, a partner at London-based Osmosis Investment Management, in a recent Harvard Business Review blog post, offers some clarity with a compelling data analysis.

He presents a comparison between two indices. The one that most investors will know is MSCI World, a common benchmark for global stock funds maintained by MSCI Inc. (formerly Morgan Stanley Capital International) and calculated since 1969. The other one is new: MoRE World, a globally diversified portfolio of large cap companies composed of the top 10 percent of resource-efficient companies from each sector of the world economy except for banks and financial firms.

MoRE World is based on an evaluation strategy launched by Osmosis earlier this year dubbed "Model of Resource Efficiency" ("MoRE" for short), which values publicly listed companies based on how efficiently they consume resources, a metric that has gained traction among sustainability-minded investors concerned about resource scarcity.

PROOF IN THE SUSTAINABLE PUDDING

The numbers are impressive. The MoRE World basket outperformed the MSCI World index by an average of almost 5 percentage points a year since 2005.

"Resource efficient companies—those that use less energy and water and create less waste in generating a unit of revenue—tend to produce higher investment returns than their less resource-efficient rivals," Heyns writes. "Resource-efficient companies also display high levels of innovation and entrepreneurship, pushing core value metrics above the average large cap global business."

"Today, we use 50 percent more resources than our planet can provide," said United Nations Secretary-General Ban Ki-moon to an audience of hundreds of students from Canada, Mexico and the United States last month at a student conference on the 20th anniversary of the International Day of Peace. "By the time you are in the middle of your careers and raising families, we will need two Planet Earths. This is unsustainable."

Thankfully for the financial markets, being sustainable is linked to being profitable. Indeed, Heyns argues that resource efficiency isn't just smart for the planet, but smart for business, describing it as "a leading indicator of economic performance and one that every investment manager should be tracking," adding, "It's about time that the financial community woke up to this fact and started to take advantage of the data."

That data tells a compelling story about a coin with two sides: sustainability and profitability. Hopefully that coin will gain more currency among companies and investors...and soon.

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NOTES

United Nations Environment Programme. Humanity Can and Must Do More with Less: UNEP. May 12, 2011. Accessed October 1, 2012.
United Nations Environment Programme. Decoupling natural resource use and environmental impacts from economic growth. May 11, 2011. Accessed October 1, 2012.
Juliette Jowit. World's top firms cause $2.2tn of environmental damage, report estimates. The Guardian. February 18, 2012. Accessed October 1, 2012.
Osmosis Investment Management. MoRE World. July 2012. Accessed October 1, 2012.
Gerrit Heyns. Companies that Invest in Sustainability Do Better Financially. September 19, 2012. Accessed October 1, 2012.
Environment News Service. UN Links Peace, Rule of Law, Sustainable Development. September 24, 2012. Accessed October 1, 2012.
Ibid.

image: Save fuel at work (credit: Clive Uptton, National Archives United Kingdom, Wikimedia Commons)

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